With China determined to now exit the Zero-COVID policy, global demand will pick up over time. As of now, demand for commodities and other related items is about 20% below the long-term average.
The comeback of global trade is not only supportive for equity markets but is also expected to impact input prices. Therefore, we would not expect the US to run into a recession but rather to kick start. That is supported by the fact that the average US consumer spending is quite resilient. As for now, the economic slow down in the US has not reduced excess capacity nor has the unemployment ratio increased—November data suggests that another 263k jobs were added. This reading is slightly lower than the previous figure, but there has not been a negative reading since April 2020. In general, we think that the average investor is underestimating the present resilience and attractiveness of the US economy. In fact, the US economy is seeing the reacceleration in e-commerce growth trends; according to Mastercard, on Black Friday, online sales were up by more than 14%, while standard sale were up by more than 12%!
Given this, the rate of inflation will probably stay high, especially as Energy (oil and gas) will remain expensive for a prolonged period of time given that there is no self-correction. The lack of historic E&P investments very much limits higher capacities. This in turn is expected to result in the FED needing to keep interest rates higher for longer. Expressed differently, the probability that we will see rate cuts in 2023 is already low to very low.
view
As of now, most institutional investors have a highly defensive stance on the market, with an overall below benchmark exposure. Yet, the consensus of the market for 2023 is geared for positive returns. We therefore would expect some catch-up effect to occur during 2023.
How to invest in this environment over the next 12 months? Given that seeking the optimal bottom based on FWD EPS expectations is impossible to achieve, we would recommend reducing the defensiveness of the allocation over time. This strategy has worked well in the past as it is results in the acquisition of much-sought growth opportunities during the final phase of the bear market. Ideally, investors should be pivoting towards an early cyclical tilt and companies that have high operating leverage. Typically, these companies can be found in IT (semiconductors), Consumer Discretionary (automobile), Energy, and Biotechnology.